Does corporate income tax avoidance require risk-taking?

Monday, May 13, 2019

tax papers and mug 

In a recent study published in The Accounting Review, Assistant Professor Kaishu Wu, School of Accounting and Finance and his colleagues David Guenther and Ryan Wilson (both at the University of Oregon) examine whether high levels of corporate income tax avoidance are achieved with additional risk-taking. In other words, do firms first exhaust relatively “safe” tax planning strategies before turning to “risky” strategies, as they pursue more tax savings?

They rely on prior research on U.S. firms that suggest that certain firms (e.g., financially constrained firms, firms with tax haven operations) engage in more tax avoidance. Using a research design of a system of equations from the finance literature, the authors find that the proportion of taxes avoided that is “uncertain” does not increase as the total level of tax avoidance increases. They use a firm’s tax reserve under Accounting Standards Codification (ASC) 740 as the proxy for uncertain tax avoidance.

The findings in this study suggest that firms engaged in high levels of tax avoidance are not necessarily doing so by assuming more risk, an indication that challenges the conclusions made by some of the prior studies. The authors argue that the differences in corporate income tax avoidance may rather be a function of managers’ incentives to exert effort or nontax costs associated with firm characteristics. 

David A. Guenther, Ryan J. Wilson, and Kaishu Wu. 2019. Tax Uncertainty and Incremental Tax Avoidance. The Accounting Review94, 229-247.